April 27. Big tax cuts, big growth, big deficits….and lower yields?

–Two serious financial experts unveiled the Trump administration’s tax reform plan and said it will lead to a surge in growth and employment, and yields fell?  Many private analysts say that higher deficits will likely ensue, and yields fell?

–One of the lessons I keep in mind, I believe from Richard Dennis, is this: when the market gets bearish news and doesn’t go down, it’s bullish.  One could easily argue that all the tax hype had already been built in, but it’s still somewhat surprising that the ten year yield eased 1.5 bps to 231.2, given the core goals of Trump, Cohn and Mnuchin of jobs and growth.  Is it all just month end buying?  Perhaps so, open interest surged in both fives and tens, +62k and +55k respectively.  There was also call buying in TYM 126 and 127 strikes, adding to already substantial open interest.  However, implied vol remains under the cloud of the French election unwind, with TYM closing at a new recent low 4.5%.  USM straddle is hovering around 3 points, ridiculously low with 30 days until expiry.  As I recently said about oil, huge levels of open interest are tinder for large moves.  (By the way, oil is lower this morning and threatening to test the March lows).

–If one needs a depressing synopsis of the low growth scenario, just read Hoisington’s new missive.  Here’s a snippet:

“The situation in the business sector deserves particular scrutiny. Business debt surged to a record 72.6% of GDP in 2016, for the first time eclipsing the prior peak of 70.2% reached in 2009. With the business sector so levered, not much room for miscalculation exists.”

But it’s not just business.  Several articles yesterday note deterioration in credit card debt:

“According to the latest data from the S&P/Experian Bankcard Default Index, as of March 2017, the default rate on US credit cards had jumped to 3.31%, an increase of 13% from a year ago, and the highest default rate since June 2013.”
And there’s an article on ZH citing Core Logic, noting that mortgage performance is deteriorating as well.
–Against this backdrop we have the Central banks.  The BoJ used the word “expansion” for the first time since 2008, but lowered inflation projections.  We have Draghi up shortly, expected to leave things unchanged, with the onset of a graceful (?) withdrawal of accommodation perhaps in June.  And then the Fed meeting next week.
Posted on April 27, 2017 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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